The apparently relentless war waged against offshore financial centres in recent years has hit at the businesses of many of the world's offshore financial centres. But the offshore jurisdictions are nothing if not resourceful, and while initiatives such as the Organisation for Economic Cooperation and Development's 'harmful tax regimes' campaign and, more recently, the European Union's (EU's) Savings Tax Directive have deprived the offshore financial centres of some income streams, particularly in the private client area, other forms of offshore work have been booming. Just as one door is closed on them by onshore tax authorities and regulators, another opens; most recently this has come in the form of investment funds work.

In September, GuernseyFinance, the promotional body for the island's finance industry, announced that the value of funds under administration in Guernsey had leapt by 37% in the space of 12 months to just under £115bn. This announcement followed similar growth in Jersey, where assets under administration surged by 32% in 2005, while the number of funds domiciled in the Cayman Islands grew by almost 20% in the same period to 7,160, according to the Cayman Islands Monetary Authority.

Offshore jurisdictions, particularly Jersey and Guernsey, have been home to substantial offshore fund domicile and administration business for many years, but the recent growth of offshore investment funds has come almost entirely from 'alternative' classes of investment funds – primarily private equity, property investment and hedge funds – as well more esoteric investments in collateralised debt obligations, residential mortgages and even vintage wine and rare postage stamp funds. "We have 40 years' experience of funds work, but the emphasis has moved to the alternative sector," says Peter Niven, director of finance sector development at GuernseyFinance.

These funds have grown in popularity over traditional equity-based funds for a number of reasons. Low interest rates and the relatively sluggish growth of stock markets in recent years have made the apparent returns offered by the private equity and hedge fund industries appear increasingly attractive, despite the risks. Another beneficiary of a low interest rate environment has been the property market, where many investors have preferred to diversify their risk through mutual funds rather than direct investments.

This has lured major institutional investors, such as pension funds, which are faced with a double whammy of falling investment returns and longer life expectancy, while the number of high net worth private investors has also grown exponentially in recent years, many of whom have turned to investment funds as measures such as the Savings Tax Directive have limited their opportunities to keep cash offshore.

These developments have played directly to the strengths of the leading offshore jurisdictions. As the investors in these funds are almost entirely 'sophisticated' institutional or high net worth investors, these funds are not subject to onshore selling regulations in the way that mutual funds aimed at retail investors are and, most crucially, are exempt from the European Savings Tax Directive. They are attracted offshore for the flexibility that offshore mutual fund regulatory regimes allow them in their investment strategies, for example the ability to short-sell or borrow money to make investments, and the relative lack of administrative compliance work required offshore.

Tax also plays a part – the lack of VAT in most offshore jurisdictions and the tax-exempt status of funds in offshore jurisdictions prevent the possibility of double (or even triple) taxation so that offshore vehicles can be used as a tax-neutral conduit for investors in a way that may not be available in onshore structures.

"We tend to domicile a fund offshore to either facilitate an investment policy that would not be permitted onshore or to avoid double taxation," says Peter Astle-ford, head of the financial services group at Dechert in London. "If you do not plan properly, you can end up being double or even triple taxed."

The growth of funds across different offshore jurisdictions has been very uneven however, with particular jurisdictions developing particular niches. The Cayman Islands, for example, has more than half the market for hedge funds, with the British Virgin Islands (BVI) following, thanks in part to its popularity with investors in the Far East, while property-related funds are mostly to be found in Jersey and Guernsey.

The Channel Island jurisdictions are also developing a specialisation in funds of hedge funds, attracting the likes of Dexion and Goldman Sachs to establish funds there in recent months. Private equity funds, meanwhile, are more evenly distributed between the Caribbean and the Channel Islands.

These niches have developed despite the growing similarity of the regulatory and legal regimes among the leading offshore jurisdictions. The speed and cost advantages in setting up funds historically enjoyed by Cayman has been substantially whittled away as Jersey and Guernsey have streamlined their pre-approval processes for funds aimed at professional investors through the Expert Funds (Jersey) and the Qualifying Investor Funds regimes respectively, while Guernsey will soon be reducing the regulatory burden further by allowing funds to be regulated through their local fund administrators rather than directly.

"Although the Cayman Islands is still the easiest jurisdiction in which to establish a fund, a fund promoter that is well-organised and willing to use local directors and administrators may well not notice the difference," says Paul Govier, investment funds partner at Maples and Calder in London.

The BVI, meanwhile, has introduced state-of-the-art legal structures and regulations aimed at attracting funds away from Cayman. "We have new superior legislation and a regulatory system that is easy to under-stand," says Robert Briant, a partner in the BVI office of Conyers Dill & Pearman. "The infrastructure is developing here too and we are putting ourselves into the position where we can challenge Cayman for hedge funds work."

Yet for all the excitement among offshore lawyers about the technical legal and regulatory advantages of their respective jurisdictions, the choice of domicile for fund promoters is overwhelmingly made on other grounds, suggesting that the efforts of some jurisdictions to grab a greater share of other centres' specialist work may not bear much fruit.

The status quo is reinforced by the respective time-zones of the Channel Island and Caribbean jurisdictions, while the insularity of US investors (many of whom, as more than one offshore lawyer remarks, wonder why Channel Island lawyers are trying to persuade to domicile their private equity funds on the other side of the Hudson River) works to the advantage of the Caribbean jurisdictions, while the availability of on-island fund administration and custodial services, together with ease of access from London for board meetings (especially useful for private equity funds), still give the Channel Islands and Isle of Man an edge with European investors. Above all, a strong herd mentality prevails among fund promoters and investors.

"There are not necessarily rational reasons for choosing a particular jurisdiction over another," Astle-ford says. "It is a question of investor familiarity with a jurisdiction, familiarity with local service providers and, in particular, what the market is used to. Fund managers often do not want to be seen to be doing something that is outside the norm."

In the mid to long term, the real threat to the offshore jurisdictions' share of the investment funds market comes not from each other but from onshore jurisdictions as they develop regulatory structures and vehicles that replicate some of the advantages of offshore structures. The UK, for example, has negated some of the advantages of offshore property investment structures by introducing real estate investment trusts (REITs), while also introducing its own 'professional funds' vehicle in the qualified investor scheme (QIS), which allows managers greater freedom over asset allocation and leverage.

The QIS scheme, however, has yet to really take off as it remains more restrictive than offshore vehicles and the unwillingness of HM Revenue & Customs to grant too many tax concessions has still left investors open to an extra layer of taxation. A further UK development is a possible onshore retail fund of alternative funds where industry professionals (including Astleford) have been consulting with the Financial Services Authority. The problems associated with QIS underline the difficulties faced by tax and regulatory authorities in large onshore economies when trying to replicate the advantages of offshore vehicles because of potential knock-on effects on other areas of taxation, which offshore centres do not have.

More of a challenge to the offshore centres comes from smaller onshore jurisdictions such as Ireland, Luxembourg and Malta, where smaller and less diverse economies give tax and regulatory authorities more room to manoeuvre. They also have benefits in terms of infrastructure, double taxation treaties and the big asset of these jurisdictions is their membership of the EU, which enables retail funds domiciled in these jurisdictions be marketed to investors across the EU. As moves continue to allow retail investment into alternative investment funds, this may prove to be a significant advantage. Many traditional offshore equity-based funds have already migrated from the Channel Islands to Dublin and Luxembourg for the same reason.

Ireland, Luxembourg and Malta are already well advanced in the process of creating and adapting their regimes to facilitate the domicile of alternative funds, and while they may never be able to fully replicate the flexibility and speed of offshore regulatory regimes, their other advantages may well outweigh a slightly more cumbersome regulatory process.

This scenario, however, is still some way off and in the meantime, the offshore funds industry looks set to continue to make hay. It may also be able to convince clients to look offshore for the skills that are there rather than tax or regulatory advantage. One bellwether of this process could be the future of Jersey Property Unit Trusts (JPUTs), the tax advantages of which were removed by the Chancellor in the 2006 Budget.

"JPUTs have given us access to clients that would never have considered going offshore before, so although the unit trusts have been clamped down on, people realise it is a good structure to hold property even if the tax advantages are no longer there," says Martin Paul, partner at Bedell Cristin in Jersey. "Jersey can sell itself on its expertise rather than tax advantages."

So even if parts of the funds business do eventually migrate away from the offshore centres, who would bet against the offshore centres finding another lucrative seam to exploit?

Offshore law firms well placed to take advantage of increasing use of AIM

With customary opportunism, it should come as little surprise that a number of leading offshore practices are among the law firms targeting work arising from the current popularity being enjoyed by the Alternative Investment Market (AIM).

London's junior exchange has seen a well-documented explosion of interest – both domestically and overseas – over the past couple of years, diversifying far beyond its traditional clientele of tech-focused startups to find favour among companies in sectors such as energy and natural resources in particular.

Businesses looking to raise cash rapidly are frequently led to establish holding companies and, predictably, often look to benefit from reducing the tax and regulatory burden of the major offshore markets.

"Investors could use English companies," says City-based Bedell Cristin partner John Ventress, "but that would leave them open to UK liabilities and tax. Some may have reasons to operate as UK-based companies, but if there is no such compelling reason then companies will look for an efficient structure in a credible, reliable market. Jersey ticks all those boxes [and] has the benefit of its tax-neutral status."

Ventress, whose practice concentrates on capital markets work, listings and investment funds, heads up a small City offering for Bedell Cristin which practises Jersey law. He points to the popularity of AIM among natural resources companies, with much of the firm's work coming from eastern Europe and Russia, where links with a handful of major City firms have proved productive.

Since targeting the work, Bedell Cristin has landed roles advising on Jersey law aspects of deals including the admission to the London Stock Exchange last year of mining and resources company KazakhGold Group, the listing on AIM of Russian communications company Rambler Media and the AIM placing of Highland Gold, then among the largest such listings on the junior exchange. "You often see an AIM admission combined with a listing on the Channel Islands Stock Exchange to bring that product to a wider audience," says Ventress.

The ranks of those watching AIM are growing wider all the time.

Appleby outgrows core markets as offshore develops increasing global outlook

Bermuda giant Appleby Spurling Hunter this year has further fuelled the wave of consolidation among leading offshore advisers after a concluding a merger with Jersey firm Bailhache Labesse.

The combined practice went live on 1 September, handing 30-partner Appleby a major presence in the lucrative Jersey market to complement its network of Caribbean offices in Bermuda, the Cayman Islands and the BVI.

The combination gives rise to one of the world's largest offshore advisers, with more than 600 staff – including 44 partners – and underlines the continuing consolidation in the offshore market.

Appleby Hunter Bailhache is now a genuine offshore giant, offering a variety of fiduciary and administrative services in addition to legal advice across a network that also includes bases in the City and in Asia, via a formative Hong Kong office.

"The philosophy was primarily about [finding a firm with] the right culture," says Appleby corporate and commercial partner Warren Cabral, who heads up the firm's City offering. "Once we had found a like-minded partner everything else fell into place. Bailhache had the same ambitions and methodology, complementary practices and similar people."

The firm has established an 'integration committee' to oversee the transition and will draw on the experience gained from the merger between legacy firms Appleby Spurling & Kempe and Hunter & Hunter in 2004.

The most recent tie-up came after Appleby called on the services of an external consultant to gauge the overall significance of the Jersey market in the evolving offshore sector.

For rival firms not yet in Jersey, similar opportunities to take over a well-established practice are likely to be thin on the ground as major players in the offshore market grow larger and become fewer.

"It was hugely important to be in Jersey," recognises Cabral. "We knew full well Jersey's position in the offshore market as something of a 'jewel in the crown'."

Plans are also now afoot to launch a Jersey-law offering in London, complementing the existing City-based expertise in Bermudian, BVI and Cayman law.

Further emphasising the increasingly global nature of offshore law, Ogier this month (5 October) became the first major offshore practice to gain a foothold in the far-flung market of Uruguay after agreeing a tie-up with BVI-based offshore boutique WSmiths.

The deal – which goes live on 1 February, 2007 – sees 14 lawyers, including two partners, come under the Ogier banner, as well as two accountants. WSmiths, formerly known as Walker Smiths, was launched five years ago and opened new offices in Hong Kong and Montevideo earlier this year.

Announcing the deal, Ogier chairman Jonathan White said: "We did not have the coverage we would have liked in Asia, which we see as a particular growth area, and WSmiths is a highly respected firm that will provide a very good fit with Ogier."

Ogier also gains its first exposure to the BVI as a result of the tie-up.

The deal represents a return to the merger trail for Ogier, which will number around 30 partners when the deal is concluded. Jersey-based Ogier agreed a pioneering transatlantic merger deal in 2003 with Cayman firm Boxalls, marking an early signpost for a spate of consolidation that shows no sign of slowing down.

Conyers joins City and US firms in dash for a share of rising Dubai market

On a similarly expansionist footing is Bermuda-based practice Conyers Dill & Pearman. In July the firm opened a new office in Dubai, emulating a number of major City and US firms to launch in the jurisdiction in the past 18 months.

Recent entrants to the market include magic circle firms Freshfields Bruckhaus Deringer while Richards Butler this summer also signalled its intention to launch in the jurisdiction ahead of its planned merger with US national giant Reed Smith.

Conyers joins offshore advisers including Walkers and Maples and Calder, which last year became the first offshore law firm to offer its services to the Dubai market. For Conyers, the new two-lawyer offering adds to overseas outposts in Hong Kong, Singapore and London and is headed up by experienced corporate partner Roger Burgess, who also worked for a time in Conyers' City base.

"We started opening offices overseas about 20 years ago, and Dubai is the latest stage of that," says Burgess, indicating that further overseas expansion, possibly in the Far East, is likely in due course. "Dubai has attracted lots of attention on account of its dramatic economic growth and the diversification of its economy away from oil and gas. Investment in infrastructure and real estate has attracted all kinds of financial institutions [and] we felt the need to be close to our international financial clients."

While preserving its focus on Bermudian, Cayman and BVI law, the firm also has the capability to practise local law in accordance with Dubai International Financial Centre (DIFC) regulations.

A move to larger office premises within the DIFC is expected next April, at which point the firm plans to increase the headcount of the embryonic operation.

Ozannes finally sees ambition to gain foothold in Jersey come to fruition

In March, Guernsey leader Ozannes confirmed that it was to launch a new office in Jersey, representing the fulfilment of a long-held ambition to target the jurisdiction. The decision by the 13-partner banking and funds specialist to open in Jersey marked the first standalone launch by a Guernsey firm in that market and served to underline the increasingly catholic outlook prevalent among many offshore firms.

"We had to be in the market, as many of our clients are across both [Jersey and Guernsey]," explains Ozannes managing partner Robert Shepherd. "[The launch] has taken up an awful lot of time and resources, [but] it is fair to say we already have more work than we originally envisaged."

The new branch finally opened for business on 1 September, with finance and investment funds specialist Marcus Stone hired to head up the new offering. Stone joined the firm as a partner from legacy practice Crills Advocates, where he had been a senior associate.

Shepherd adds: "We did look at a merger at one stage – we were flirting and courting other firms and we did get quite close to one firm. But offshore firms are not like big City firms. We have 11 or 12 partners and our culture is extremely important to us. We felt that a merger could dilute that culture."

In contrast, offshore rival Walkers departed from its usual strategy of launching standalone practices in target jurisdictions to make its own debut in the Jersey market. The Cayman Islands-based firm gained a foot-hold in the market after securing a takeover of Stone's former firm, with Crills officially coming under the Walkers banner on 1 July.

"We had undergone a certain amount of growth in international finance work in recent years and we were looking to get to the next level," says capital markets and structured finance partner Peter Harris, who heads up Walkers' financial services business team in Jersey. "You can be happy with the level of service you are offering but there is no substitute for critical mass."

"I think most people would argue that the pre-eminent centre on this side of the pond is Jersey and on that side is Cayman," says Harris. "[Recent mergers are] recognition that our clients are global players now. Walkers had a piece missing and with Appleby [Hunter Bailhache] we have seen something very similar."

The practice, which is headed locally by real estate partner Julia Melia, numbers almost 30 lawyers in Jersey and plans for growth are likely to focus on practices areas including structured finance and investment funds, with a move to larger office space currently scheduled for the beginning of the new year.

Meanwhile, Jersey rival Bedell Cristin also moved to broaden its reach, announcing in February that it was planning to launch a Guernsey office later in the year.

Those plans came to fruition in April, when the new office was launched with the hire of corporate lawyer Mark Helyar from local practice Babbe Le Pelley Tostevin. The move continued a period of growth for the 14-partner firm, which has launched four new offices in recent years, with openings in Dublin and Geneva subsequently followed by the launch of the Jersey law City practice. "We are trying to use the Guernsey office to replicate what we have in Jersey," says Bedell Group managing partner Richard Gerwat. "The only area in which we are not yet practising is dispute resolution, but that is on the starting blocks."